Taxes and Closing Pitfalls

Mon, 10/03/2022 - 6:45am

In previous Closer's Corner articles we have discussed taxes and how they can affect your transaction:
https://texasnationaltitle.com/article/property-tax-time
https://texasnationaltitle.com/article/property-taxes

This month we will specifically look at the Over 65 exemption and how it can affect a buyer or seller.

When looking at tax prorations we find that there is little to no guidance offered by the contract. The contract states:

Taxes for the current year, interest, maintenance fees, assessments, dues and rents will be prorated through the Closing Date. The tax proration may be calculated taking into consideration any change in exemptions that will affect the current year's taxes. If taxes for the current year vary from the amount prorated at closing, the parties shall adjust the prorations when tax statements for the current year are available. If taxes are not paid at or prior to closing, Buyer shall pay taxes for the current year. 

The contract does not offer instruction on how taxes should be prorated when there is an exemption that applies to the seller but does not also apply to the buyer. 

To further complicate the matter the entity that decides how to handle the tax exemptions is the county tax office and their methods can be quite difficult to understand. We often see the county remove an exemption that was on the property post closing which can mean (1) the buyer gets a larger tax bill for the year and (2) the prorations at closing may not balance to the taxes the county will be assessing for the year

Since the power to alter exemptions falls on the county and not the title company, it can be a real challenge to properly prorate taxes between buyer and seller for closing. For this reason the title company often has to seek guidance from the listing and selling agent as to how to prorate taxes for any given file.    

Over 65 Exemption
If a taxpayer is eligible for an Over 65 they can pay their taxes in installments without penalties instead of having to pay it all at one time.  The taxpayer may also “defer” or postpone tax payments, with the consent of their lender, by filing a “tax deferral affidavit.”  This only defers the tax liability and interest continues to accrue.  With a deferral, the taxes are due in total 181 days after the death of the owner that qualified for the exemption.  

These types of exemptions are transferable to another home. Note however, if the taxpayer claims another homestead during the year, the exemption is no longer allowed on the prior homestead for the remainder of the year and the taxing units will prorate the taxes based on the number of days elapsing after the taxpayer ceases to qualify to the end of the year.

Typically the seller carrying an Over 65 exemption also has very reduced taxes. 

Let's look at a sample scenario:
John has owned his property for five years and he carries an Over 65 exemption. His property is valued at $900,000 and his annual property taxes are $4,000 due to the exemption. Jane is buying the property and Jane does not qualify for the exemption. Without the exemption the property taxes would be $10,000. 

If the taxes are prorated with the exemption the daily proration amount would be $10.96.
If the taxes are prorated without the exemption the daily proration amount would be $27.40.
If closing were to occur at the end of the September the difference in the tax proration / credit to the buyer would be $2,992.08 compared to $7,480.20. 

Let’s assume that the exemption was not raised for discussion between the buyer and seller and instead the title company just prorated without considering the exemption at all.  In that scenario the buyer could receive the smaller credit from the seller but if the county removes the Over 65 exemption that same buyer could get a tax bill for closer to $10,000 for the whole year.  When this happens the buyer has the option to go back to the seller and seek reimbursement for the increased amount due from their ownership period.

WHAT IS THE BEST WAY TO AVOID THIS SURPRISE?
As a realtor you should be looking at the tax certificate to flag any files with potential exemption issues.  The best time to address a discrepancy is before closing so that the issue can be resolved with mutual consent between buyer and seller. If the issue is discussed and negotiated prior to closing then the parties are aware of the potential risks before closing and there can be no surprise later in the year for either side. 

Since the county controls this process the main focus should be making the clients knowledgeable about the changes that can happen so that they are appropriately prepared. 

From a closing standpoint the title company is able to prorate the taxes in any manner in which the parties jointly approve. Talk to us! While we cannot tell anyone what the county will (or will not do post closing) we can help explain the proration options. When we get to closing we will also have all parties sign a disclosure confirming that they understand the process that was used for closing.  

Our closing teams at Texas National Title are very knowledgeable about property taxes and prorations procedures. We are happy to help review the most up-to-date info before the property goes under contract and we are here to be your partners in navigating this topic.  We are the experts that you need and the partners that you can trust to get your deals closed!